If you can relate to a time when unexpected expenses have piled on without a solution in sight—you might benefit from a debt consolidation loan. Choosing to consolidate your debt can be a good option to help chip away at the debt and save some money while you’re at it! Read on below for details on how debt consolidation works and some of its benefits.
What Is Debt Consolidation?
Debt consolidation is combining multiple debts into a single debt. This happens by taking out a completely separate and new loan. This allows you to make one monthly payment for all of your debts.
The goal of any form of debt consolidation is to lower the amount of interest you pay on your debt (which should ideally reduce the amount of your monthly payments). This benefit of debt consolidation is most helpful if you have several high-interest debts like credit cards, car loans, or student loans for example.
How Does Debt Consolidation Work?
Let’s say you’re carrying a balance on an auto loan plus two credit cards, all with varied interest rates. Instead of making three different monthly payments, you can consolidate those three debts into one single debt through a debt consolidation loan.
You’ll make monthly payments toward your debt consolidation loan until the loan term ends. Keep in mind you’ll want to find a loan with a lower interest rate than what you originally had across your debts to help keep your monthly payment lower.
You also want to make sure you don’t get a longer term than what you already had, to avoid paying more in interest over time.
Benefits of Debt Consolidation: One Payment
When you take several debts and consolidate them, you simplify your life. There’s no longer a need to keep up with multiple payments and due dates. You’ll see this makes it easier to pay down debt faster since there’s just one balance on which to focus.
Plus, if you’re able to lower your monthly payment by consolidating to a loan with lower interest, you can use the money you save each month to pay more towards your loan principal. Missing and late payments cost you money in late fees and they also hurt your credit score, so consolidation can help you in more ways than one.
Increase Your Credit Score
When you consolidate your debt from multiple sources into one loan, it could result in a temporary credit score dip but over the long term, it will increase your credit score. Much like applying for any loan, the application process for a debt consolidation loan typically includes a hard inquiry on your credit.
Your credit score is based on other factors though including credit utilization, which measures how much of your available credit is in use.
By getting a new loan and using it to pay off other debts, you may increase the amount of available credit you have without increasing the amount of actual credit used—which could increase your credit score.
Your payment history has a big impact on your credit score, so paying on time will certainly help improve your credit score.
Reduce Monthly Bills
If you have multiple credit cards, remembering to make payments on all of them can be a hard task to keep up with each month. A debt consolidation loan allows you the convenience of making one payment which is easier to budget for monthly. Reducing monthly bill payments allows for a roomier budget to pay for other monthly expenses.
When consolidating debt with the end goal of paying it off within a certain time, try to avoid the use of credit cards. Once you’ve committed to this decision, you won’t be tempted to continue to rack up even more debt outside of your consolidation loan.
Lower Interest Rate
Depending on the terms set by your credit card company, your minimum monthly payment could be going to pay off the monthly interest, which doesn’t reduce your overall balance. With a debt consolidation loan, you’ll get a low, fixed-rate compared to the variable rate that most credit cards offer.
This allows more of your monthly payments to go towards paying off your actual debt rather than just paying off monthly interest charges.
Save Money and Pay Off Debt
When you consolidate your existing loans, credit cards, and other debts into a single loan, you have the chance to lower the interest you pay. This can save you a significant amount of money in the long run.
Your total interest paid monthly will be reduced if you pay on time and in full with your newly consolidated loan. But always be sure to compare your current monthly payments, interest rates, and terms with those of the new loan to make sure the move will end up being the most cost-effective for you in the long run.
Tackle Debt Today
With debt consolidation, you can simplify your finances and work towards living debt-free.
Compare your options and decide if a personal loan is right for you with us at Jeanne D’Arc Credit Union!